What is the better way to invest a large amount of money: Lump Sum or Gradual Investing?
While working with widows, I’ve noticed there are some unique issues they face. One of them is what to do with a large amount of money that they’ve suddenly received (often through life insurance proceeds, and also through the sale of the deceased spouse’s business). Many of us are accustomed to receiving money on a regular basis through our income. But most of us aren’t used to receiving a large lump sum of money.
And assuming that they want to and it fits into their financial plan, one question becomes: how should you invest that large amount of money? Should you invest a lump sum all at once? Or should you invest the money gradually until you are fully invested?
To help think this through, let’s discuss the pros and cons of each option.
Lump Sum Investing
There are a few really good benefits when you put your money into the market all at once. First, you don’t have to worry about making the trades for the next month or the month after that. Instead, you do it once and then let the investments do the work from there. It’s simple and relatively hassle free.
Another solid benefit is that over the long term, you’re likely to come out ahead financially as opposed to putting it in the market over time. According to Vanguard, “On average, an immediate lump-sum investment has outperformed systematic implementation strategies”
The reason for that is quite simple: Over the long term, the stock market trends upward. A rough rule of thumb is that the market goes up three out of every four years.
So the sooner you start investing, the sooner you can take advantage of this upward trend. Which means that on average, financially, you’ll come out ahead if you invest it all in month 1 as opposed to evenly putting it in every month for 12 months.
With those two very solid reasons of less hassle and on average greater returns, is lump sum investing 100% the way to go? Not exactly. Let’s discuss some of the benefits of investing gradually.
Gradual Investing
When I use the term gradual investing, I am referring to buying a fixed dollar amount of an investment on a regular schedule. So let’s say you receive $100,000 from an inheritance. If you wanted to invest that amount gradually, that $100,000 would be invested equally over the course of 12 months. So you’d be buying $8,333 worth of investments every month until your entire $100,000 was invested.
Why would you do this instead of investing it all at once?
For starters, risk. Investing all at once adds on a layer of risk that some may find uneasy.
Let’s say that you put all of your money into the market at once, only for the stock market to fall 20% in the next couple months. If you put your money in gradually, you would be able to take advantage of this fall in prices as you would be buying every month, especially at the lower prices. But if you put it in all at once, well, you simply wouldn’t have any more money to invest when prices are lower.
In other words, investing gradually would limit some risk in case there is an immediate market dip.
The second reason to consider this gradual strategy is to lessen stress and worry. Instead of worrying about the worst case scenario (the market falling dramatically the day after you invest your money), you can now sleep easier knowing that if the market does fall, you will be able to benefit from buying gradually.
Ultimately, though, this comes down to your preferences. On average, investing the lump sum will carry more risk but get you higher returns. While gradually investing will lower your risk and lessen your financial stress.
So what do you think? Would you choose to invest the lump sum, or invest gradually? I’d love to hear what you think. You can email me at scott@dev-forthrightfinances.pantheonsite.io, or contact me here.